Recently, the Supreme Court’s judgment of July 25, 2023, appeal 2334/2021, has been published, establishing a favorable criterion for taxpayers regarding the tax treatment of remuneration and compensation received by administrators and top executives in the Personal Income Tax (IRPF).
In its judgment, the Supreme Court sets relevant case law that clarifies the applicability of the reduction for irregular income in the IRPF, currently set at 30% (previously 40%) according to the IRPF Law, for so-called “irregular” income, which are those with a generation period of more than two years or those classified as notably irregular over time (closed numbers).
Likewise, the judgment confirms the established jurisprudential criterion that senior management personnel have a minimum dismissal or termination compensation of seven days of salary per year worked, with a maximum of six monthly installments, which is exempt from IRPF.
Tax treatment of compensation for administrators and top executives
- Exemption from dismissal pay for senior management personnel: The Supreme Court confirms that senior management personnel, by virtue of labor law and its implementing regulations, are entitled to a minimum, unavailable, and exempt compensation in the IRPF under article 7.e) of Law 35/2006 of the IRPF. This compensation for dismissal or termination is equivalent to seven days of salary per year worked, with a maximum of six monthly installments. This conclusion is based on previous case law criteria and remains in force.
- 30% reduction for irregular income: The remuneration and compensation received by administrators, considered as income from work, can benefit from the 30% reduction for irregular income established in the IRPF Law, provided that they have been generated over a period of more than two years. In the case under review, this reduction is applied to the excess received by the top executive in relation to the minimum compensation, which is the most common scenario for the application of this reduction.
European Union law and the link theory
The judgement also addresses the link theory in light of European Union Law and argues that, in accordance with the jurisprudence of the Court of Justice of the European Union, the link theory cannot be used to “worsen the condition.” to workers who are also administrators compared to those who do not hold this dual position. This means that workers cannot be discriminated against based on whether they are administrators or not for tax purposes and, in general, for all purposes.
Conclusions and the possibility of claiming the refund of unlawful income
In summary, this Supreme Court judgment definitively clarifies the rules regarding the tax treatment of compensation received by top executives and administrators in the IRPF.
In this regard, any unconsolidated legal situation of a taxpayer (administrator or top executive) who had not applied the exemption or the reduction for irregular income in compensation received in previous years, should be analyzed in order to potentially request a refund of unlawful income in their IRPF.
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